Forestry flourishes as world finds its feet

By LIBBY MIDDLEBROOK

The New Zealand forestry industry was in a growth phase again last year after a tough time triggered by the Asian economic crisis in 1997. The outlook for this year is just as promising.

The two largest companies - Fletcher Challenge and Carter Holt Harvey - started to report a return in Asian demand for basic wood products last January as volumes of value-added products strengthened in Australia and North America. Later in the year, prices started to recover too.

"It was the first time we've started to head back up after three years of decline," said James Griffiths, chief executive of the Forest Industries Council.

"We've all been amazed at how quickly Asia recovered, coupled with that we had really robust construction here in New Zealand and Australia which has created a great demand for lumber and other finished wood products," said Jay Goodenbour, chief executive of Carter Holt Harvey Forests.

"We don't really see those things letting up going forward. We're actually projecting that we'll do record volumes to Korea this year."

The improving market was reflected in the performance of most forestry companies. Carter Holt's forestry division, for example, reported after-tax profits of $55 million for the six months ended September 30, compared with $41 million in 1998.

Profits were also boosted by cost and job-cutting programmes by the forestry companies designed to make forestry and manufacturing operations more efficient.

Carter Holt said it had added $170 million to the group's earnings during the last two years thanks to the company's Genesis cost reduction programme.

Meanwhile, corporate events during 1999 included the sale of Carter Holt's 30 per cent indirect shareholding in Compania de Petroleos de Chile (Copec) for $2.5 billion to the Angelini Group.

The sale put an end to a 13-year-old joint venture and a long-running dispute with the Angelini Group, a Chilean family company. Carter Holt plans to use the cash injection to pay off debt and invest in its business.

Carter Holt confirmed the construction of a $130 million laminated veneer lumber plant to be built near Whangarei this year. To feed the mill, it is planning to build a sawmill nearby and is searching for a foreign investor to help fund the cost of building it.

The plants are just the first of a raft of investments the industry will need to make to process the expanding harvest. During the next two decades the annual wood harvest is estimated to increase by 1 million cu m, the equivalent of 35,000 truck and trailer loads.

Last year was also notable for the sharp difference in forestry management practices which developed between the industry's two largest companies.

Carter Holt has opted not to prune trees, producing lower quality logs for Asian markets where the bulk of its business is generated.

"We're going to have to make sure we find ways to make radiata the lowest-cost material in the world," said Mr Goodenbour.

"It's not the highest quality when you compare it with other species in the world, so what we have to do is realise that its advantages lie in being low cost."

Fletcher Challenge has a differing view. The company, which is more focused on US markets, plans to continue selective pruning of trees, exporting processed wood products to lucrative markets like North America.

"We see the future of the industry moving more into processed wood products," said Fletcher Challenge Forests spokeswoman Ginny Radford.

"New Zealand's additional volume of wood will have to be exported so we're targeting the higher-value end of the market."

The boost in wood product sales in Asia last year also improved public interest in long-term forestry investments.

Steve Wilton, business director of investment company Forest Enterprises, said the number of domestic investors increased by more than 5 per cent during the year.

The company, which manages forests on the east coast of the North Island and represents about 6300 investors, plans to increase its marketing budget this year.

"The Asian crisis didn't just affect forest owners, it also put a bad taste in people's mouths from an investment perspective, but that's all behind us now."

A bright outlook was also forecast by stock market analysts. Dennis Lee, a forestry analyst with ABN Amro, predicted growth in Asian and US markets as well as stable commodity prices.

"Commodity prices will be strong as global economies continue to recover," he said.

Ord Minnett analyst David Shirer said demand for lower quality logs was expected to remain stable this year in Korea, a major market for New Zealand which was hit very hard during the Asia crisis.

Longer term, the ability of forestry producers to export larger volumes hinges mainly on getting better access to markets. At present forestry exporters face tariffs of up to 60 per cent for value-added wood products in Asia. But progress in the talks could be very slow judging by the conflicts which swamped the WTO conference in November, preventing it from drawing up an agenda for the overall negotiations.

Meanwhile, Forest Research chief executive Bryce Heard said it had been a disappointing year for research and development, with a 40 per cent drop in funding from forestry growers.

He said interest in research projects picked up during the final quarter of the year, with a stronger focus on consumer solutions and environmental issues.

"In a nutshell, we had a pretty poor year. There's been a dramatic fall away in the amount of investment into forest research."

However, Forest Research's main funding providers say they did not reduce their overall levels of research spending in 1999.